Opinion: Here’s the to-do list for the future U.S. president

RevaGoujon

Dear candidates of the 2016 U.S. presidential race:

Five of you remain with about 30 weeks until Election Day. Three of you won’t even make it out of the primaries. And yet, American voters and foreign observers all search for substance in your stump speeches, trying to imagine their lives and the world at large under your leaderships.

Those of us who view the world through the prism of geopolitics remind ourselves that campaign rhetoric tends to diverge from post-election policy. The constraints built into the presidency as well as those shaping the international system will inevitably blur personal distinctions and mold policy decisions, whether the winning candidate carries anti-establishment credentials to Washington or is working to create or uphold a political dynasty.

We understand that perspective is hard to come by at this stage of the race, and you are obsessively watching the polls and attempting to shape your image to a media ready to pounce on every slip. But the world is watching at a time of great uncertainty. Candidates will require dispassionate analysis and a deep understanding of history to navigate the challenges that lie beyond our borders. Whoever enters the White House come January, this briefing attempts to frame the geopolitical state of the world awaiting you.

Back to growth fundamentals

While it is easy to blame presidents for breaking the economy or credit them for fixing it, they will ultimately be judged by how well they manage the phase of the country’s economic cycle that overlaps their time in office. It just so happens that the current phase of the cycle — the great global deleveraging — is comparable to that of the 1930s.

Eight years ago, central banks reluctantly became the first responders to a world that had seized up after overindulging in credit-fueled growth enabled in large part by China’s record rise. As debt repayments soared and global depression loomed, governments and central banks had no choice but to intervene. The painkillers came in the form of liquidity injections, large-scale purchases of market securities and a discomforting world of zero and negative interest rates, all in the hope of stimulating consumer spending to drive sustainable growth.

As governments became more wary of their debt burdens and voters, they backed off, and the central banks were largely left to manage the crisis. And while central banks have lulled markets back into complacency and have bought political leaders time, growth engines are still sputtering, and income inequality has reached a point of political severity.

The United States, less exposed to trade fluctuations than its peers, has been the first to recover and begin the process of normalizing its economy through a gradual rise in interest rates. But that strategy is sensitive to economic headwinds from abroad. The U.S. economy cannot operate in a vacuum, and the global dominance of the dollar stretches U.S. influence into nearly every corner of the world. And so while the U.S. president does not influence the Federal Reserve’s monetary policy, the consequences of that policy reach around the globe.

For example, a dovish Fed policy in raising rates will limit the damage inflicted on the Chinese yuan by a strong dollar, but that move simultaneously creates more problems for the euro and yen by pushing them higher in relative terms at a time when both the European Central Bank and the Bank of Japan are running out of ammunition. The more unorthodox measures that central banks must undertake to stimulate growth, the more political scrutiny they will face as their efforts decline in utility with time. If central banks cannot carry sick economies through the deleveraging process, then the more burden politicians will have to shoulder to find the right blend of spending cuts, wealth transfers and debt restructuring to pave the path toward rising incomes, productivity growth and inclusive employment.

Those politicians, however, whether at home or abroad, face the tyranny of election timetables and are now caught in the middle of a revolt by voters fed up with years of economic stagnation and bereft of faith in government institutions. As the anti-establishment movement grows louder, political consensus becomes harder to find, and the probability of achieving a timely and balanced policy mix to manage this phase of the crisis decreases. The United States can take some solace in the fact that it is on the most stable economic footing relative to the rest, but there is more economic volatility to come in the rest of the world. The growing limits of foreign monetary policy in this great global deleveraging will be one of several factors driving future geopolitical conflict.

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